Procerity

Two groups of people are going to end up paying for the financial crisis: savers and taxpayers. The government’s decision to expand the money supply to offset short-term deflationary pressure does not come without a price. The price will be in the form of vigorous inflation, and the cost will be born by those who hold cash or debt, especially long-term debt. Taxpayers are also on the hook. Government funded backstops (TARP, debt guarantees, overpayment for toxic assets, for example) are ultimately funded by the taxpayer. Taxpayers who are also savers will be paying twice, once through taxes and again through the loss of purchasing power. While taxes may be difficult to avoid paying, there is still time to shed cash and fixed income assets.

Procerity’s Prognosis: 30-year US government bonds, currently yielding 3.8%, are going to appear extraordinarily expensive in retrospect.